Wal-Mart's (NYSE:WMT) management has declared Canada to be a growth market and plans to invest aggressively to expand its footprint there. However, Wal-Mart's weak same-store sales in Canada, coupled with Target Corp's very public and recent failure in the country, could be worrying investors. How will one big-box retailer thrive in a market where the other failed? And how will Wal-Mart boost sales?
Apparently unfazed by these concerns, Wal-Mart is moving ahead with its Canada expansion. Let's explore if the Arkansas-born retailer actually has what it takes to survive in America's northern neighbor.
The story so far
Wal-Mart entered Canada as a non-food retailer in 1994, two years after its first international expansion in Mexico. It took its time to build the brand in Canada through its discount stores, which offered almost everything except grocery. By the end of fiscal year 2006, it had 272 discount stores in the country.
In fiscal year 2007, it finally made its move into supercenters and grocery, trying to take advantage of Canada's local retail chain Loblaw's weakness in the fresh food segment. With 394 stores today, Wal-Mart competes with local Canadian chains such as Loblaw, Sobeys, Safeway, and Metro. Wal-Mart's market share in overall Canadian retail has increased from 3.8% in 2004 to 7% in 2014, according to Euromonitor, as cited by Market Watch.
More recently, Wal-Mart witnessed six consecutive quarters of same-store sales decline before reaching positive growth in the last two quarters. In the last reported third quarter, Wal-Mart Canada's comparable stores sales increased 0.6%.
Wal-Mart's growth strategy in Canada has centered around offering grocery items in its 280 supercenters in country. Grocery brings shoppers back to stores repeatedly, and because its supercenters are one-stop-shops, customers are likely to spend money on other items as well.
Wal-Mart's frantic inclusion of grocery in its stores started in 2011 when Target (NYSE:TGT) announced its plans to enter the Canadian market. Wal-Mart started to convert its discount stores to supercenters, and that decision seems to be bearing fruit. In a Financial Post article, Kevin Grier, an independent food industry analyst, says Wal-Mart had a 12% share in the $88 billion Canadian grocery market in 2014 fiscal year, which could increase to 13% to 14% for fiscal year 2015. In the third quarter of fiscal year 2015, the fresh produce segment recorded double-digit sales growth alone.
Given this impressive performance, Wal-Mart plans to build 29 supercenters at a cost of C$340 million ($273 million) over the next 12 months. This will increase total store count to 396 and total supercenter count to 309 by the end of fiscal year 2016.
Wal-Mart Canada's focus on groceries is evident from the estimates made by analyst Vishal Shreedhar of National Bank Financial, who cites the current expansion will add 230,000 square feet or 0.5% more retail space compared with last fiscal year, while the growth in food square footage will be 3.3% year-over-year.
Will Wal-Mart succeed in Canada?
Though Target's exit raises questions about Wal-Mart's fate in Canada, there are quite a few factors that go in favor of the latter. Target took a major misstep by hurriedly opening stores in Canada before studying the preferences of Canadian shoppers. It had the wrong products, it goofed up on the pricing, and overall it was an operational disaster.
But Wal-Mart has been far more cautious. It, too, had teething troubles when it first arrived in Canada, but it took a slow and steady approach. It forayed into the grocery segment a good 12 years after its entry in Canada. Wal-Mart offered the right products at competitive prices and stood its ground against the fierce local competition.
This approach allowed Wal-Mart to accelerate its supercentre rollout at the right time and reap the benefits. Global News reported that Wal-Mart's grocery segment has grown by 35% between 2008 and 2013, while market leader Loblaw witnessed a 5% decline in its market share during the same time. The same source said that while rival discount grocery banners like Loblaw's No Frills, Metro's Food Basics, and Empire's Price Chopper could increase sales when Target entered Canada, it will be tougher for them to ward off the competition from Wal-Mart.
Wal-Mart's plan to expand its grocery business to boost overall Canada sales makes sense. Demand for fresh grocery items in Canada is increasing, Wal-Mart is successfully fighting competition from local retailers, and instead of just expanding the retail space, the company is building overall capabilities in terms of distribution centers and e-commerce. Ultimately, success will depend on the efficient implementation of the plan, which could open a promising growth avenue for the company and its investors.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.